What is in this article?:
- Partial budget is simple, useful financial tool
- The benefits side
• A partial budget is a simple, useful financial tool to evaluate changes you may make on your farm.
• It analyzes net financial return from small changes or refinements to your farm operation.
• It focuses only on those income and expenses that change with the proposed new alternative.
• Basically, you consider the benefits and costs of the proposed change by answering four questions.
The benefits side
Looking at the benefit side of the equation if you expect corn to yield 150 bushels per acre and you anticipate selling it for $6.50 per bushel then 100 acres would give you an additional $97,500.
If the total costs to grow dry beans are $550 per acre then by not growing 100 acres would reduce costs by $55,000. The total additional revenue and reduced costs is $152,500.
On the cost side, the reduced revenue from not growing dry beans would be the anticipated yield of 22 hundredweight per acre times the expected price of $40.00 per hundredweight times 100 acres for a total reduced revenue of $88,000.
In addition you have the cost of growing corn. If the total costs to grow corn are $690 per acre then it would cost $69,000 to grow the 100 acres of corn. The total reduced revenue and additional costs is $157,000.
In this simple example the change in net income would be $152,000 minus $157,000 for a negative $4,500. Therefore it would not be financially beneficial to switch from dry beans to corn.
This partial budget just looked at the financial picture. One also needs to consider various production and financial risk; factors such as timeliness of operations like planting and harvest, how it fits into a crop rotation, labor availability, etc.
Partial budgeting has its limitations. It is useful for measuring short-term simple changes. If the change involves longer-term changes or purchases, then tools like capital budgeting may be more appropriate. These tools take into account the time value of money that partial budgets may not.
Labor and management changes may need to be considered. Partial budgeting does not always consider risks involved in the change such as the availability of markets or legal risks.
When doing partial budgeting it is a good idea to run the analysis with a range of costs, yields and prices to get a sense on how these may affect your net result.